Times Of Swaziland: ACCOUNTING IRREGULARITIES AT MATSAPHA COUNCIL UNCOVERED

ACCOUNTING IRREGULARITIES AT MATSAPHA COUNCIL UNCOVERED
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Phila  Sibiya on 03/03/2019 03:36:00


MBABANE – An audit report meant for Matsapha municipal council management’s
eyes paints a gloomy picture of the industrial town’s finances.
Renowned audit firm PricewaterhouseCoopers (PwC) found that the municipality has
a porous accounting process that leaves it highly susceptible to fraudulent
activities.
The audit is for the financial year ended March 31, 2018.
The biggest concern was uncovered in the institution’s trial balance.
A trial balance is a bookkeeping or accounting report that lists the balances in
each of an organisation’s general ledger accounts.
The debit balance amounts are listed in a column with the heading ‘Debit
balances’ and the credit balance amounts are listed in another column with the
heading ‘Credit balances’.
The total of each of these two columns should be identical.
Trial balance found not in order
In a letter directed to Mayor Sandlane Zwane and Chief Executive Officer Lucky
Sukati, the auditors, giving an update on the audit work, said when they first
received the trial balance from the town treasurer on August 29. 2018, they
noted it ‘was not in a proper format’.
They said this was communicated to the town treasurer who promised to take the
matter up with the systems vendor. The auditors said they then received a
revised version on September 7, 2018 but there were still problems because
‘the debits did not equal the credits’.
A further revised version was received on September 18, 2018 which had been
updated for some of the differences noted by the accountants and auditors. There
was then a meeting between the auditors with councillors and management on
September 24, 2918 after which the auditors received a further updated version
of the trial balance on September 25, 2018 which had been updated for further
differences that had been queried by the auditors with management.
The auditors said in the latest trial balance, ‘the total debit amounts still
do not agree to the total credit amounts by about E7 000’.
The other irregularity that the auditors raised was with regard to the
municipality’s fixed assets register where it was identified that there was a
difference of about E700 000 between the balance on the fixed assets register
when compared to that on the trial balance.
This difference was reportedly communicated to the accountants to investigate in
September 10, 2018, which resulted in a revised fixed assets register together
with a revised trial balance being submitted on September 18, 2018.
“The difference noted had reduced to E19 000 between these two documents,”
noted the auditors.
They said upon inspecting the fixed assets register, they noted that the
categories of the assets were not easily identifiable and management was asked
to look into resolving this query.
The other big concern raised by the auditors was when they asked for an accruals
schedule from the accountants on September 11, 2018 but were handed a general
ledger and not a detailed listing or schedule.
Accruals are adjustments for revenues that have been earned but are not yet
recorded in the accounts, and expenses that have been incurred, but are not yet
recorded in the accounts.
An example of an accrual involving an expense is an employee’s bonus that was
earned in 2012, but will not be paid until 2013.
The auditors said they reported to management that they required a schedule
instead of the general ledger and this led to the accountant emailing them a
revised report of the accruals on September 20, 2018, which showed a total of
E1.1 million.
“We identified a difference of about E6 million between this balance and the
balance as per the trial balance which we requested that management should check
for us,” reported the auditors.
The following day (September 20), the accountant reportedly emailed the auditors
a revised report of the accruals which reflected a balance of E700 000.
“We reported on the same day that we could not follow the work which had been
performed on this report,” stated the auditors.
After receiving the updated accruals schedule of E700 000, the auditors said
they also received an updated trial balance from the accountants.
“The balance of accruals on this trial balance was about E800 000, and from
discussions with the accountant on September 25, 2018, they will pass the
necessary adjustments in order to correct this difference which was caused by
incorrectly posted items,” said the auditors.
In the September 25, 2018 meeting with the accountant in order to understand the
work done on the schedule, the auditors said they were comfortable with the
process which had been followed when resolving the earlier noted E6 million
difference, hence they proceeded to perform audit tests over this information.
In the audit report to management, the auditors said implication of such an
anomaly with the schedule could be the ‘loss of track of how much amounts are
owed to which suppliers at any point in time’.
“There is also the risk that management may make incorrect payments to
suppliers if they do not maintain a comprehensive record of amounts owed.
Errors, irregularities and other fraudulent transactions may not be identified
and corrected timely,” said the auditors and recommended that council should
maintain a proper detailed listing to support amounts owed to suppliers at year
end, something management said it noted.
Serious concerns on fixed assets
In the report, the auditors continued to raise serious concerns regarding the
status of the municipality’s fixed assets register.
It was noted that the total of fixed assets (property, plant and equipment) on
the fixed assets register was not reconciled to the total of fixed assets in the
trial balance.  The auditors said the difference between the fixed assets
register and the trial balance amounted to E759 980.
“We also noted that there was a number of updates which had to be performed on
the assets register during the audit which was an indication that the fixed
assets register was not appropriately reviewed and reconciled during the
year,” said the auditors while also stating that the fixed assets register was
subsequently reconciled to the trial balance.
But the auditors noted that the implications included that ‘errors,
irregularities and other fraudulent transactions may not be identified and
corrected on time’ and ‘property, plant and equipment may be misstated’.
The auditors recommended that the fixed assets balance as per the fixed assets
register should be reconciled to that reflected in the trial balance on a
monthly basis and the difference noted should be followed up and investigated on
a timely basis.
Still on the property, plant and equipment, the auditors noted that some of
these fixed assets purchased during the year were recorded under accounts
payable instead of being capitalised to property, plant and equipment.
“This resulted in misstatement of accounts payable by over E4 million,”
noted the auditors.
Subsequent to this observation, the fixed assets were then reportedly
reclassified from accounts to fixed assets on September 18, 2018.
The auditors noted that such an anomaly could lead to the council’s fixed
assets being understated and depreciation expense amounts, which are calculated
for fixed assets, may also be misstated. Also, accounts payable may be
misstated.
They recommended that the ‘fixed assets which have been purchased during the
year should be properly capitalised to property, plant and equipment and not be
recorded under accounts payable.
Management, according to the report, said it would ensure that all assets were
capitalised on time.
What was also found was that most of the fixed assets owned by council were not
tagged hence they were not easily traceable to the fixed assets register.
Therefore, the auditors said it might be difficult for council to identify its
fixed assets and it was recommended that they ‘should be tagged for easy
reference and tracing’.
Bank account found to be in shambles
Besides the fixed assets register, even the institution’s main bank account
was found to be in shambles. “From our inspection of the cash balance of the
entity at the start of the audit, we noted that the main account balance was not
tying up with the balance reflected on the bank statements and the balances
which were being confirmed by the banks to the auditors,” the auditors said.
When this was brought to the attention of council, it was then that the bank
balance was updated by a consultant to reflect a correct bank balance.
“Subsequent to the above observation, the bank reconciliation was revised
following assistance from the systems provider. The balance as per the cash book
was misstated,” reads the audit report.
The implications of this, according to the auditors, include that the
‘financial records relating to the balance in the bank accounts may be
materially misstated’.
The auditors then recommended that the reviewer of the monthly bank
reconciliations should monitor these closely and ensure that the correct
transactions amounts are used when updating accounting records in the general
labour.
E108 000 staff loans not traced
Another anomaly that the auditors uncovered was in respect to loans, where an
amount of E108 000 that was given as staff loans could not be traced, resulting
to them being listed as ‘doubtful debts’.
The auditors uncovered the untraceable loans after noting that some of the
balances included in the accounts receivables had been carried forward from
previous years and had not been cleared.
The consequences of this could be that ‘other receivables may be misstated’
and that ‘balances may not be recoverable and may eventually be written off
resulting in financial loss to the council’.
They recommended that long outstanding accounts receivables, which have not
cleared within a period of 12 months, should be investigated and written off or
provided for if there is doubt regarding their recoverability’. Responding to
this, management said it noted the recommendation and ‘investigations on the
issues will be conducted’. The auditors went on to uncover an anomaly in the
payment of allowances to members of management where it was found that they were
being paid in cash instead of electronic funds transfer.
CEO paid E35 148.75 allowance in cash
One such payment was in respect of subsistence allowance to the amount of E35
148.75 that was paid to the town clerk/CEO on June 1, 2017.
“There is an increased level of risk associated with cash payments,” warned
the auditors, while also stating that another implication of this was ‘loss of
audit trail’. A recommendation from the auditors was that ‘council should
consider paying members of management for trips to be undertaken through
electronic funds transfer instead of cheque or cash payments’. A further
irregularity found by the auditors touched on petty cash records where figures
did not tally.
One observation was a petty cash balance of E5 800 which was recorded in the
financial records but could not be reconciled to the petty cash records of the
council.
A second observation was a cash on hand balance of E26 000 on the trial balance
that had been carried over from previous financial periods but did not exist at
year end.
Even though the auditors said this was subsequently resolved through a journal
entry on September 18, 2018, there were implications that included that
‘errors, irregularities and other fraudulent transactions may not be
identified and corrected timely’ as well as that ‘cash and cash equivalents
may be misstated’.
It was recommended that council should maintain the record of petty cash and
these records should show the trail of petty cash amounts from the point at
which they were withdrawn from the bank accounts to when these amounts were used
for business purposes and eventually to the records of the petty cash which
remained unused. “The council should also perform regular reconciliations of
petty cash usages and these reconciliations should be reviewed. The council
should also consider performing regular petty cash counts,” said the auditors.
No support documentation
for cheque payments
An additional observation by the auditors was the municipality’s failure to
maintain supporting documentation for cheque payments.
In one instance, the auditors said they sampled a cheque amounting to E9 689
with the description ‘subsistence allowance’ which they could not obtain
supporting documents for. There were three implications that could be a result
of this anomaly, one of which is that ‘it may be difficult to verify whether
the funds were actually used for the intended purpose or whether there were any
left-over funds which should have been returned back to the council’.
The second implication is ‘lack of appropriate paper trail’ and the last one
is that ‘the revenue authority might conclude that there is insufficient
evidence to support that costs were incurred for business purposes’. Two
councillors, one of whom is a member of the Finance Committee, said the
anomalies that had been raised by the auditors were of a serious nature and
should be investigated by an independent institution.
Councillors want financial
operations probed
“We would like to call on Parliament, specifically House of Assembly, to
institute a commission of enquiry into the council’s financial operations. The
audit has provided enough reasons to convince us that there is a lot of
mismanagement in the institution’s finances,” the members said.
The councillor, who is a finance committee member, said when they saw the
auditors’ findings, they wondered why the bank records were not balanced on a
monthly basis by the town treasurer such that they had to be corrected by
technicians at the end of the year. “This may encourage fraud and funds may be
directed to people’s personal bank accounts,” said the member.
He said as councillors they doubted the status of the accounts and questioned
the performance of the town treasurer’s competence.
“For instance, how can you allocate E4 million asset additions to accounts
payable? Let’s go back to accounts 101; assets have a debit balance whilst
accounts payable have a credit balance. What they did is totally
unacceptable,” decried the councillor.
He said with regard to the assets that were not tagged or easily traceable, the
question was what then was the purpose of a fixed asset register if the assets
cannot be found? “This is a very great risk as it is easier to point a wrong
asset whilst that asset disappeared a long time ago,” he said.
He was echoed by the other councillor, who questioned why fixed assets that had
been disposed of still appeared on the fixed assets register.
“This can make us believe that assets are still at council premises yet they
are at someone’s homestead,” he said. On the issue of the untraceable staff
loans, the finance committee member said they suspected that these were never
repaid because had they been paid back, they would have been cleared from the
accounts books.
The councillors said while PwC issued a clean or unqualified audit report, they
believed that there were fraudulent transactions that existed within the
institution, hence a forensic audit should be carried out. This information
comes to light after the conclusion of a commission of enquiry into operations
of the municipality that was instituted by Minister of Housing and Urban
Development Prince Simelane after infighting among councillors and management
brought the town into chaos.
Councillors, management officials, government officers and ratepayers who have
testified before the commission threw wild accusations against each other and
these have been explosive in most instances.
A report on the commission’s findings has since been submitted to the
ministry.